What can you tell me about stored value cards?



The selling points of prepaid debit cards are powerful. Proponents say the cards are convenient and safer to carry than cash. They are easy to obtain because there is no credit check, no bank account required and no verification of employment. Consumers are told the cards can save money, help budget, manage finances, help avoid debt and even establish credit. They are told that prepaid debit cards can help control spending, since consumers put the amount on the card they would like to spend. Could this be the answer for helping Utahns stay away from debt?

Not likely. In fact, when looking at the terms of use closely, there is cause for concern. Consider this information:

  • How do stored value cards work?
    These cards are marketed as prepaid debit cards or stored value cards (SVCs). Magnetic strip technology stores information about money that has been prepaid to the card. The first prepaid cards to hit the market were single-purpose cards used to purchase goods at specific retailers, such as prepaid telephone cards and cards used for public transportation. Copy centers offer them for use with copy machines.
    Department stores issue them as gift cards. Students using prepaid university cards can navigate campus without a dime in their pockets using the cards in the cafeteria, the bookstore, the library and even at soda machines. These single-purpose cards are convenient, simple and there is no fee to the buyer or user. If you buy a $50 telephone card, you can make $50 worth of phone calls.
    More recently, however, cards have emerged with multi-purpose usage. These cards can receive direct deposits and can then be used to make cash withdrawals at ATMs. They can be used for retail purchases, to pay bills and to make money transfers. In fact, if branded with a bankcard name, they can be used everywhere the issuing bankcards are accepted. According to industry estimates, roughly 7 million Visa or MasterCard branded SVCs are in the marketplace. Experts say this industry is in the early growth stage with substantial growth potential in the years ahead.

  • How can consumers lose?
    Consumers need to know that multi-purpose SVCs are often laden with excessive fees. Usually there are no fees to put money onto the card or to check your balance on-line. The fees start when you want to use your money. There is a one-time activation or set-up fee, which can range from $5.95 to $140. Annual and monthly maintenance fees can range from nothing, if you keep a minimum balance or bring 10 or more referrals to the card program, to $99.95. A convenience fee is charged to each purchase, ranging from $1 to $2. To get cash from an ATM can cost $1.50 to $3.75. Checking your balance at an ATM may cost $1. To speak with a customer service representative will also cost $1. There are fees for additional cards, lost or stolen replacement cards, returned checks and overdrafts. Consider how easy it would be to lose track of the amount on the card, then have to pay an overdraft fee of $29.
    Other potential charges to watch for include transaction limit fees, bill payment fees, phone or online transaction fees, reload fees, money transfer fees, out-of-network domestic ATM transaction fees, international ATM transaction fees, inactivity fees, overdraft protection fees, payday advance fees, credit-reporting fees and dispute fees.
    Additionally, consumers need to be aware that some financial transactions generate dual fees. You may have stashed your card away for emergencies. If the card is not used for a period of time (i.e., 90 days) you are charged, in addition to your monthly maintenance fee, an inactivity fee. Also, depending on the ATM machine used, the ATM provider may impose charges to your transaction in addition to ATM fees listed by your card carrier
    Multi-purpose SVCs are often confusing and complex. Some impose fees associated with value load or reload. It is unclear what these terms imply and how they differ from adding money via a bank transfer or direct deposit. Also confusing are membership programs available to reduce monthly or yearly fees. These programs depend on referrals. In return, you will earn an ongoing income, depending on the level at which you and your referrals are approved. Then there’s the issue of how points are earned. You worked for this money once, now you may have to work for it again.

  • What else should consumers know about SVCs?
    Certain populations are targeted, many of whom are elderly or poor. Many cards advertise that Social Security money can be direct-deposited free of charge. The poor are targeted with ads stating that their cards will help build credit. Those who don’t like traditional banking are told they don’t need a bank account or employment verification to have a card. These cards may be increasingly offered at check-cashing outlets.

  • Are these cards legal?
    Yes. Fees are not regulated by the federal government, nor are they regulated in Utah. As long as the company issuing the card discloses the fees, it has fulfilled its legal obligation. Also, most SVCs fall outside the realm of traditional banking so they are not subject to Federal Deposit Insurance Corporation (FDIC) regulations. This means cardholders’ funds are not protected if the bank fails. Consumers may also be out of luck if the card is lost or stolen.

  • Why then, are consumers using these cards?
    The cards may suit some consumers for several reasons. First, they are convenient. Second, if a consumer cannot qualify for traditional credit cards, they are an alternative. If used properly, the cards can help build a good credit rating. Third, SVCs are useful for small purchases online because they can be convenient and can offer anonymity. Finally, some cards offer benefits such as car insurance.
    Consumers should ask how much the convenience of the cards is worth to them. They should carefully examine the terms of use and compare these cards with traditional banking cards offering similar benefits and services. For those who have no or poor credit, most banks offer secured cards with lower fees.
    Stored value cards are becoming increasingly popular. However, the next time you see an ad stating they are just like a credit card without the debt, remember to be cautious and do your homework before signing up. You shouldn’t have to pay to use your own money.

For further information, visit http://www.consumerfed.org, http://www.eufora.com/, http://stored-value-cards.fcpages.com/ and http://www.ny.frb.org/regional/stored_value_cards.html.

Posted on 3 Dec 2004

Ann House
Bankruptcy Prevention

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